Minority Shareholders

Wednesday, November 11, 2015

Positive Private Company Culture (Part 3): The Real Deal Matters in the Real World

Sincerity is everything. If you can fake that, you’ve got it made.” George Burns

We smile as we read George Burns’ famous quote because authenticity is such a key to success, we know some companies will attempt to fake it.   In the business world where clients crave authenticity, however, false attempts at sincerity are a major turnoff.

How do we know that a company gets sincerity?  The small things often provide the best clues.  My brother-in-law, Jeff Frankel, owns a Mexican restaurant, Mattito’s, and it was obvious he was doing the right thing the first time I visited when the waiters quickly refilled the chips and salsa without being asked. At Mattito’s, diners are greeted with a friendly warmth that cannot be faked. The food is always great, and is served promptly. Jeff treats his employees like family, many of whom have worked at Mattito’s for years. They enthusiastically respond to his genuine appreciation.  These “small things” spell success for Jeff, and his restaurants receive glowing reviews.  It is therefore no surprise that Jeff will soon be opening his fifth Mattito’s location in the Dallas/Fort Worth area (across from Vista Ridge Mall).


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Wednesday, November 4, 2015

Building A Positive Company Culture 101: A Critical Asset Not on the Balance Sheet (Part 2)

I came to appreciate the importance of a positive business culture when I first started practicing law as an associate attorney more than 30 years ago – well before the advent of smart phones, tablet computers and even the internet.

An organization’s culture is not set by decree; it is established through the (often subtle) actions of its leaders.  At my firm, the name partner and co-founder built our culture through the way that he treated people.  He insisted that everyone at the firm call him by his first name and he would stop you in the hall (always with a smile) if you called him by his last name.  Despite his busy schedule, he made the time throughout the year to call everyone – from senior partners to receptionists and mail room clerks – to wish them a happy birthday on their special day.  He lived out our culture by being approachable and showing that success would be based on merit, not rank. His remarkable openness, warmth and personal attention set the tone for the firm, which resonated both internally and externally.


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Tuesday, October 27, 2015

Company Culture 101:A Critical Asset Not on the Balance Sheet (Part 1)

While I was waiting on a delayed flight at the airport last week, a stranger sitting next to me made things more interesting by starting up a conversation with an intriguing question.  His question to me went like this:

Question

I busted my ass this week checking out installations for my company all over town, and I even drove to one place I heard about that wasn’t even on the list they gave me. The problem is that while I was at this place, I was in a hurry and accidentally locked the keys in the rental car, and they charged me an extra $100 to come unlock it.  Do you think that I should submit this extra charge as a business expense to my company or cover it myself?

A number of responses came to mind, including, why are you asking me—a stranger—for my opinion.  But, here is a summary of some of the thoughts that I shared with him.


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Monday, October 5, 2015

Red Flags for Minority Investors in Private Companies 101: Smoke v. Fire

Minority investors in private companies accept significant risks in making non-control investments, including both business risk and management risk.  Examples of business risk are many and include increased competition, changes in government regulations and gaining or losing patent protection.  The focus of this Post, however, is on the risks minority investors are exposed to from majority owners who exploit their control over the company.  Specifically, this Post reviews red flags indicating that the company’s management is acting other than in the best interests of the company and its investors.


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Tuesday, September 8, 2015

Private Equity Investment 101: All That Glitters Is Not Gold

Majority owners of successful private companies are typically focused on growing their businesses.  Maintaining a robust growth rate requires owners to reinvest in their companies, however, which in turn, often creates a need for a capital infusion.  When the need for capital to invest in the business exceeds the cash flow that the company is generating, an investment from a private equity (PE) firm may be the answer.  In return for its investment in the business, the PE firm will obtain a minority ownership stake in the company.

An investment by a PE firm can be transformative for a growth company, but this type of investment also comes with potential pitfalls that majority owners should consider carefully.  In this Blog Post, we review key concerns that majority owners will want to address in structuring the terms of a PE investment in their company.


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Monday, August 24, 2015

Employee Ownership 101: Pitfalls for Employees as Minority Owners in Private Companies

On the face of it, the grant of minority ownership interests to key employees in private companies should be a win-win for both emerging companies and also for key employees of the business.  The company offers an equity stake to key employees, but pays them modest, below-market compensation to help launch and grow the business.  The employees agree to accept the low level of compensation, but they are incentivized by the minority ownership interest they receive in the business in hopes of obtaining significant financial rewards in the future when the company is ultimately sold, merged or goes public.  Drilling down a bit, however, problems may arise here, particularly for the employees who are granted a minority ownership interest in the business, but have no employment contract and no provisions to protect them in regard to their minority ownership stake in the company.


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Wednesday, August 5, 2015

Valuation 101: The Buck Stops Here—Valuing a Minority Interest in a Private Texas Company With a Contractual Buy-Sell Provision

As we discussed in our post on February 5, 2015, the wise investor recognizes the critical importance of a “corporate prenup” and will therefore insist on securing some form of buy-sell agreement before investing in a limited partnership, limited liability company, or closely held corporation.  The buy-sell agreement is a contractual exit strategy that benefits both majority and minority owners.  It provides majority owners with a contractual means to buyout the interests of minority owners and provides minority owners with the ability to cash-out of their investment. The importance of securing a buy-sell agreement became even more essential for minority owners last year, however, when the Texas Supreme Court decided in Ritchie v. Rupe to suddenly eliminate the right of minority shareholders to secure a court-ordered buyout as a remedy for oppression by the majority owners.


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Monday, June 22, 2015

Paying the Piper– Under Texas Law, Who Foots the Bill For Shareholder’s Legal Fees In Private Company Litigation?

Who pays the legal fees of private company shareholders when they battle each other in court, often in a fight for control of the business?  This is a key question, because the high cost of legal fees is critical, particularly in litigation among shareholders in private, closely-held Texas companies.  All shareholders are therefore striving for ways to pay for or recover their legal fees when they litigate against the other shareholders of the company.

Generally, the majority owners of the company control the business, which provides them with control over the corporate purse strings and the ability to pay their legal fees in any disputes they have with minority shareholders. This Post looks at the question of whether the exercise of control by majority owners in directing the company to pay their legal fees will hold up when it is challenged in court by minority shareholders. The short answer is that there is good news and bad news for both majority and minority shareholders under Texas law regarding the payment of legal fees in these shareholder conflicts..

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Monday, June 8, 2015

Texas Supreme Court Issues New Opinion Upholding Right of Minority Shareholders to Bring Claims in Derivative Lawsuits

Summer must be here. In June 2014, the Texas Supreme Court issued a long-awaited decision impacting the rights of private company shareholders in Texas. See Ritchie v. Rupe. As summer begins this year, the Supreme Court has again issued a significant opinion regarding the rights held by minority shareholders in private companies. In its latest ruling, the Court tells the business and legal community: “We meant what we said when we said it in Ritchie last year.” See Sneed v. Webre, (No. 12-0045, Tex. Sup. Ct., May 29, 2015)


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Thursday, May 28, 2015

Shareholder Deadlock Part 2- Contract Terms To Consider (Including Buy/Sell Provisions) To Resolve Future Conflicts

Shareholder deadlocks in private companies often result in protracted legal fights to break the impasse that are expensive and also highly disruptive to the business.  In some cases, these business conflicts can even lead to the forced dissolution of the company.  Just as importantly, these ownership battles are destructive to personal relationships because closely held businesses are frequently owned by family members or longtime friends.

Private companies are prone to shareholder deadlocks when there is no single owner (or no ownership group) who owns a large enough stake in the company to exercise control over the company’s business operations.  Shareholder deadlocks are readily avoidable, however, through advance planning.  Ben Franklin’s famous quote was never more apt than in the private company context:  “An ounce of prevention is worth a pound of cure.”


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Tuesday, April 28, 2015

A Legislative Fix is Being Considered for the Loss of Minority Shareholder Oppression Claims in Texas - the Antidote to Ritchie v. Rupe.

When the Texas Supreme Court decided last year (in a 6-3 decision) to jettison decades of appellate case law and deprive minority shareholders of the right to bring claims for shareholder oppression against majority owners, the case generated extensive comment, including in our previous Blog Posts.  See Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335, at *10 (Tex. June 20, 2014); read more.  In reaching its decision in Ritchie, the Court reinterpreted a long-existing Texas statute in a novel way adverse to the interests of minority shareholders.   The far-reaching impact of the Ritchie decision continues to generate comment and also pointed criticism, most notably from the Yale Law Journal.


Read more . . .


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